Newbie question - Tax efficient Drawdown

HibbyAndrew

Hi,

I've been trying to plan ahead for near future retiral for my wife and I

Newbie Question - Are there any reasons why I would not take a 25% Tax free Lump Sum from Pension A immediately?

I understand that any future withdrawals from that Pension would be subject to 25% income tax. 

Year 1 - My intention would be to withdraw the £75k, Put £40k (2x£20k) into me and my wifes ISA then use the rest to partially fund our years expenditure

Year 2 - Repeat with pension E

Year 3 onwards until state pension  - withdraw to keep us both below income tax level (unless otherwise needed e.g. new car)


Background
Married - No mortgage - No Debts - No Dependants
Me(54) - Retired last year  Wife(54) - Retire this year

Me - DC Pension A - £300k
Me - DC Pension B - £120k
Wife - DC Pension C - £75k
Wife - DC Pension D - £25k
Wife - DC Pension E - £180k
Wife - DC Pension F - £35k
Wife - DB Pension G - £4.5k annually after 65
Savings/ISA/Shares - £300k

p00hsticks

If you are not currently paying tax, then rather than taking the whole tax free lump sum now, instead wouldn't it be better to use UFPLS to take an amount that uses up to your tax allowance, thus saving some of your tax free allowance for when your state pension kicks in and you are probably going to be paying tax again. 

Marcon

HibbyAndrew said:

Hi,

I've been trying to plan ahead for near future retiral for my wife and I

Newbie Question - Are there any reasons why I would not take a 25% Tax free Lump Sum from Pension A immediately?

I understand that any future withdrawals from that Pension would be subject to 25% income tax. 

Year 1 - My intention would be to withdraw the £75k, Put £40k (2x£20k) into me and my wifes ISA then use the rest to partially fund our years expenditure

Year 2 - Repeat with pension E

Year 3 onwards until state pension  - withdraw to keep us both below income tax level (unless otherwise needed e.g. new car)


Background
Married - No mortgage - No Debts - No Dependants
Me(54) - Retired last year  Wife(54) - Retire this year

Me - DC Pension A - £300k
Me - DC Pension B - £120k
Wife - DC Pension C - £75k
Wife - DC Pension D - £25k
Wife - DC Pension E - £180k
Wife - DC Pension F - £35k
Wife - DB Pension G - £4.5k annually after 65
Savings/ISA/Shares - £300k

There isn't a 25% income tax rate (yet!). Tax would be at your marginal rate.

Why take more tax free cash than you need out of tax-favoured environment and put it in a 'fully taxable' destination? Phased drawdown might make more sense, unless you are especially keen on the simplicity of taking the £75K in one go.

HibbyAndrew

Hi P00hsticks,

I guess that really what my question is.

If I take the £75k Lump Sum, then I can then withdraw up to £12570 each year tax free from the remainder, so total tax free withdrawal up until pension age would be approx. £200k (75k + 10 x £12570)

If I dont take the £75k, then my total tax free withdrawal would be a maximum of £16760 (10 x 16760)

Not sure if I'm just oversimplifying? or if that makes sense?

kempiejon

Congrats on getting out ahead of the norm. Looking at the numbers and shelters I think, like @p00hsticks, the tax efficient method is preserve as much pensions tax free allowance; hopefully pensions will continue to grow for decades. One could max UFPLS his and hers each year to use personal allowance, draw from £300k savings/ISA/shares pot if needed. However this is limiting the available income to stay within tax allowances.

With 6 DC pensions I'd cast an eye over charges, flexiblity etc. I colleced 4 personal pensions into one SIPP and saved a meaninful amount over my expected timeframe.

HibbyAndrew

P00hsticks - Thanks

Just reading your answer again, I hadnt considered tax free withdrawals post State Pension, so your thats something I need to consider.

dunstonh

Newbie Question - Are there any reasons why I would not take a 25% Tax free Lump Sum from Pension A immediately?

Yes.   Typically not taking it up front is more tax efficient.  However, it depends on what you do with the tax free cash.   Also some people just take the TFC and dump it in a savings account rather than leave it invested.

I understand that any future withdrawals from that Pension would be subject to 25% income tax. 

Unless you know plans for the next Budget, its not 25%.

Year 1 - My intention would be to withdraw the £75k, Put £40k (2x£20k) into me and my wifes ISA then use the rest to partially fund our years expenditure

Year 2 - Repeat with pension E

That is wasteful.  You have personal allowances use to use up first and you should do that with the taxable element of the pension.  Not the tax free element.

Upto age 74, you really don't want to take the TFC unless there is a justified reason for doing so.  Moving it into S&S ISAs can be a good reason (especially as you get closer to 75) but with no justifiable reason for doing so, you would take as little as required.    
e.g. £16,760 drawn out under UFPLS would be free of tax.  75% =  personal allowance and 25% is tax free cash.  Between you that is £33,520.  Then use your cash savings to utilise the £3600 contribution a year each.

Me - DC Pension A - £300k
Me - DC Pension B - £120k
Wife - DC Pension C - £75k
Wife - DC Pension D - £25k
Wife - DC Pension E - £180k
Wife - DC Pension F - £35k
Wife - DB Pension G - £4.5k annually after 65
Savings/ISA/Shares - £300k

Some consolidation may be a good idea.

singhini

Reading this thread is confusing me. 

The OP has a pension pot of £300,000

He could take 25% tax free in year one and then another 10 years of £12,570 which = £200,700
Or
11 years of £16,760 = £184,360

Surely the first option is better?

Hoenir

HibbyAndrew said:

Year 3 onwards until state pension  - withdraw to keep us both below income tax level (unless otherwise needed e.g. new car)

Have you drawn up a fully costed budget i.e. including how you'd like to spend your retirement time. As matters stand with personal tax allowances frozen (until April 2028).  Your household income will be £104 per week.  

Albermarle

singhini said:

Reading this thread is confusing me. 

The OP has a pension pot of £300,000

He could take 25% tax free in year one and then another 10 years of £12,570 which = £200,700
Or
11 years of £16,760 = £184,360

Surely the first option is better?

With the first option there is no more tax free cash to take, whilst in the second they will still have about £30K tax free cash available. 

Albermarle

kempiejon said:

Congrats on getting out ahead of the norm. Looking at the numbers and shelters I think, like @p00hsticks, the tax efficient method is preserve as much pensions tax free allowance; hopefully pensions will continue to grow for decades. One could max UFPLS his and hers each year to use personal allowance, draw from £300k savings/ISA/shares pot if needed. However this is limiting the available income to stay within tax allowances.

With 6 DC pensions I'd cast an eye over charges, flexiblity etc. I colleced 4 personal pensions into one SIPP and saved a meaninful amount over my expected timeframe.

Plus once you start withdrawing taxable income from them, it can really confuse HMRC when you have multiple income streams, especially if they are irregular.
Worth noting also that consolidating pension pots after the tax fee cash has been taken is more complicated than doing it before.